For many homeowners, houses have become more than just a place to live – they are seen as an investment vehicle, a pension or even a savings bank. But this reliance on property is likely to make the effects of the housing market downturn even more painful and widespread.

It is no wonder that many homeowners view bricks and mortar as a cash cow. House prices rose 224 per cent between July 1995 and August last year, putting the 180.3 per cent growth in the FTSE 100 over the same period firmly in the shade.

People keen for a bigger slice of the action bought extra properties and let them. Buy-to-let landlords put £1.5 billion into property in the past decade alone. It was so attractive as an investment that for thousands of people it replaced pensions as the preferred method of retirement saving. Tom McPhail, pensions research manager at Hargreaves Lansdown, the independent financial adviser, said: “People were attracted by the apparent upward one-way bet on property.”

Homeowners were able to taste tangible benefits of house price rises. As the value of their property rose, many cashed in slices of equity to boost their incomes. They withdrew £57 billion in equity from their homes in 2004 alone. This in turn boosted consumer spending, benefiting the whole economy.

The insatiable demand for housing also ensured lucrative employment for thousands of people. Construction workers, electricians, plumbers and estate agents were all kept busy as more buyers demanded homes. Manufacturers and retailers of household goods, garden implements and DIY materials grew used to profitable weekend trolley-jams in their aisles as buyers fitted out their new properties. But now that activity in the housing market has stalled and prices are slipping, the housing market looks set to drag everyone down with it.

The number of new loans granted to homebuyers last month slumped 36 per cent compared with May last year, figures from the Council of Mortgage Lenders show, highlighting the slowdown in activity in the housing market. First-time buyers are staying away from the market as the average deposit demanded by lenders rose to a three-year high of 13 per cent.

Construction firms are already feeling the pain of the housing slowdown, with Barratt, the country’s second-biggest housebuilder, fearing for its future if prices continue to fall. Estate agents are also in trouble, some expect that 15,000 jobs will go this year alone.

The pain on the high street has been even more acute. Share prices started to slide last summer as analysts warned investors that consumer spending was falling. Shares in some of the biggest names in the sector have halved, including Topps Tiles and Home Retail Group, home to Argos and Homebase, as the fall in housing activity hits sales of sofas, beds and wardrobes. Even John Lewis, the untouchable star of the sector, said that sales of homewares this year were the weakest since 2004. However, it is not only housing-related industries that will feel the pain.

Howard Archer, of Global Insight, an economic consultancy, said that price falls had a big impact on consumer confidence. “Even if the owners have no intention of selling, the fact that houses are falling in value affects their confidence.” In the UK, consumer confidence is at an 18-year low, recent surveys show, as consumers grapple with sliding property prices as well as sharp rises in utility bills, food costs and sharply dearer fuel to get to work.

In addition, the seizure in the mortgage market prompted by the credit crunch is forcing mortgage rates up, hitting homeowners again with increased home-loan payments. About 1.5 million homeowners will have to remortgage this year and pay much more for their home loans.

Two thirds of British consumers think that the country is in recession, so difficult are the financial circumstances in which they find themselves. Falling house prices and a dip in confidence will discourage homeowners from withdrawing equity from their home. Mortgage equity withdrawal dropped by nearly a half in the final three months of last year as house prices began to fall, the most recent figures from the Bank of England show. About £7 billion was withdrawn between October and December last year, down from £13.7 billion in the same period in 2006.

As an added disincentive to withdrawing cash from their homes, lenders are now offering the best mortgage rates to those with higher equity in their property. Investors who planned to use property to provide their retirement income will be doubly alarmed by the slide in house prices and are likely to return to saving, rather than spending, experts say.

The knock-on effect of the housing market on consumer spending is not new. Spending has mirrored trends in house prices since the 1970s, according to Capital Economics, the economics consultancy. While the slowdown in consumer spending has already taken its toll in the housing sector, experts say businesses such as hotels, restaurants and bars may be next. But if the slowdown in spending is as sharp as some economists forecast, all businesses will feel the effect.

Phil Dorgan, analyst at Panmure Gordon, said: “The British consumer is more geared to house prices than almost any consumer in the world. There’s a high level of consumer debt as a proportion of GDP – if house prices fall it absolutely affects consumer spending and if we move into negative equity it will get even worse.”

The spectre of negative equity – where people owe more than they paid for their home – is sending chills through already shaken homeowners.